India Set For 2026 Rating Upgrade After S&P Outlook Shift, Say Brokerages
Outlook revision by Moody’s and Fitch’s ratings are expected after the budget, Citi said.
S&P Global's recent revision of India's economic outlook may pave the way for a rating upgrade by 2026, with other agencies likely to follow suit, according to brokerages.
Citi suggested in a Wednesday note that the global rating agency could upgrade India's rating by late 2026 or earlier, with Moody's and Fitch expected to reassess their outlooks post-budget. The pre-Covid public debt target of 60% may not be necessary for an upgrade, Citi added.
On Wednesday, S&P upgraded India's sovereign credit rating outlook from 'stable' to 'positive', citing confidence in the nation's policy stability, economic reforms, and infrastructure investments. However, it maintained the 'BBB-' long-term and 'A-3' short-term unsolicited foreign and local currency sovereign credit ratings.
Noumara said in a Thursday report that S&P's move could lead other agencies to follow suit, potentially resulting in a sovereign rating upgrade within the next two years. This shift reflects optimism across various macroeconomic indicators.
Citi emphasized that India's fiscal deficit remaining below 7% of GDP would be a crucial factor for anticipated ratings in fiscal 2026. An earlier upgrade isn't out of the question, the note added, with Moody's and Fitch expected to reassess their outlooks post-budget.
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Citi's outlook aligns with S&P's projections, anticipating a general government fiscal deficit of 6.8% of GDP and public debt reaching 81% of GDP by FY 2027-2028.
Moody’s and Fitch previously upgraded India's outlook to "stable" from "positive" in 2021 and 2022, respectively. Notably, S&P never downgraded India's outlook to "negative" even during the Covid pandemic, according to Citi's analysis.
Here's what brokerages said about S&P Global's rating upgrade:
Citi
The market discussion will probably now shift to 'when' rather than 'whether' the actual rating upgrade will happen.
A pre-election results/budget outlook upgrade suggests confidence in India's structural macro drivers.
In line with Citi's view, S&P expects the general government fiscal deficit to reach 6.8% of GDP and the public debt to reach 81% of GDP by fiscal 2028.
Rating upgrades would depend on the fiscal deficit staying below 7% of GDP on a sustained basis.
Expects a rating upgrade by S&P around late 2026, but will not be surprised by an earlier upgrade.
Other two agencies could review ratings post-budget, and an upgrade to outlook cannot be ruled out but is not a foregone conclusion either.
Nomura
Sets the stage for a possible upgrade in the sovereign rating in the next two years.
This stems from broad-based macrooptimism across growth, inflation, fiscal, and external parameters.
The brokerage finds the timing puzzling, as the outcome of the general elections will have a material impact on India’s macro prospects.
Believe that S&P’s action could prove to be the harbinger of more activism by rating agencies in the near future.
